I don't think this is what Stiglitz had in mind...

When Joseph Stiglitz proposed to move the world away from using the American dollar as the reserve currency, I doubt it was so that nations could circumvent economic sanctions.  However, that is exactly what India and Iran are doing.

http://www.forbes.com/sites/kenrapoza/2012/03/20/india-facilitates-iran-oil-shipments-allows-for-non-dollar-deals/

Negotiations have been going between India and Iran since word of the US/EU sanction against Iranian oil and Iranian capital holdings overseas.  In a move to cripple Iran's attempts at nuclearizing, the sanctions have in effect hurt those of our allies who rely on Iran for their oil, namely India and South Africa.  South Africa has been forced to find alternatives, but Indian bankers have come up with a better idea.

Indian banks pay 45% of the value of Iran's oil in Rupees, which Iran will use to pay for its imports of Indian goods.  A rather complicated issue which sounds simple enough, the deal will in effect make the Indian Rupee, never considered a strong currency, a de facto bilateral reserve currency.  With $10 billion dollars of oil headed for India each year, and $2 billion of exports heading back from India to Iran (now planned to double to make up the difference - 45% of $10 billion is $4.5 billion), this deal will effectively save India from the US sanctions against Iran. 

Actually, it will improve India.  With exports needing to double this creates thousands of jobs, a great benefit for the struggling ruling party.  In addition, with all the transactions for trade for at least the foreseeable future being done in local currency, this is just one more barrier to trade which has been removed.

So, Mr. Stiglitz, is this really what you want?  Without the dollar as a global reserve currency, the United States' ability to sanction international finance and trade will, and arguably has already become, more limited.  This is the story of removing the global economy from a US Treasury-backed reserve currency: as the global economy gains stability, it also gains further independence from the political influence of the United States.  Some may see this as a good thing, since free marketers see sanctions as simply the political manifestation of forced inefficiency.  However, without a peaceful way to limit Iran's advance towards nuclear power, what is the alternative method...?

Is Obama really calling for an end to Fuel Subsidies, or just sucking up to voters?

Now, I hate subsidized agriculture and oil.  It creates inefficiency in the economy by allowing some to sell goods at prices below market value, a failure to pay the full marginal private cost for the good, resulting in higher demand for the good than the market would determine as an efficient equilibrium.  Subsidies also reduce competition and pays from the federal budget to do it.  In some cases it takes no more than ensuring a business keeps its edge on the market in return for political support.  Theoretically all free market enthusiasts should be against subsidies, but it is surprising how many there are in the U.S.  Anyway, as you can tell, I am not a fan.

So when I saw that President Obama called for an end to subsidies on oil earlier this week, I was quite ecstatic.  But I was also surprised.  A loss in subsidies will mean that the price of oil will increase, right?  Can Obama afford for the price of gas to go above $5 per gallon during an election year?  I would argue that he can’t.  If the national average goes above $5, I think he will have a much more difficult election than he should.  So, I guess the question is, why is he pushing for a cut in the subsidy? 

A number of reasons, first of which is the obvious value in the political rhetoric of appearing angry at massive and profitable MNCs and “standing with the American people” while having little chance that the subsidy will ever reach a vote.  Even if the subsidy never gets to a vote, which I sincerely doubt it will, Obama has had his moment in the sun at least appearing as though he doesn’t like subsidized oil.

However, I am hopeful that he might be heading in the right direction, with the goal of real action on the issue.  ExxonMobile, the largest energy corporation in the world, posted revenues of $121.6 billion dollars and profits of $9.4 billion last quarter, up from last year.  The simple fact is that these corporations can afford to be unsubsidized.  The petroleum and hydrocarbon markets are not infant industries, and need no protection.  Competition should be encouraged to the maximum.  With national security so vested in the oil market, it would seem that the greatest price stability and efficiency would be the best policy, so I say lets kill the subsidy.

A repeal of - or even a reduction in - the subsidy makes the price closer to the true cost of the oil (although it should be far higher since the marginal social costs of almost anything, but especially oil, are never factored into the price).  Some predictions show that the lost demand at a higher price would create greater losses to the companies than if they simply ate the lossed revenue difference of the subsidy.  Arguably, cutting the subsidy may not make the price of oil go up at all.  It will just mean that the corporations make less and the government pays them less out of the federal budget, possibly a win-win in my opinion.

So we will see…is it a political stunt or a realistic move in the right direction.  I give it till April 25^th, when gas switches to a more expensive type, one better suited for summer use, storage, and transport (don’t ask me about the technicalities of petroleum chemistry – I study political science).  As the price of gas goes up as summer gets closer, the more difficult it will become to make this all happen, so the sooner the better.  Unless of course you are a fan of subsidizing companies which already make billions.  In that case there is little reason for you to ever read this blog again.

Ramo's THE AGE OF THE UNTHINKABLE

Joshua Cooper Ramo has an interesting argument: most of the leaders of our world, and our country, look at the world in the wrong way.  His explanation is that we all are looking at the world in confined terms, unable to see the reality, that the future is unpredictable.  Ramo uses contemporary physics experiments and interviews with “experts” ranging from Hezbollah leadership to Nobel winners.  Those who have learned to view the world correctly, as a constantly changing and adapting world which fails to conform to any models, are the ones who are successful (i.e. the leaders of Hezbollah, some Fortune 500 CEOs, and a handful of physicists). 

Ramo takes an interesting look at modern physics experiments.  The work of Danish physicist and biologist Per Bak is of particular relevance to Ramo’s argument.  Bak wanted to understand the nature of avalanches, most importantly, their predictably.  He devised an experiment to build sand piles one grain at a time and see how they eventually collapsed.  He found that no matter how many times he did the experiment, he could not predict the outcome, nor control it.  Ramo used Bak’s experiment and applies it to political science.  We cannot predict the outcomes of the next “grain of sand” into our global system, so we can only prepare ourselves to meet the global “avalanche.”  We do this by understanding how “avalanches” work. 

Ramo’s argument goes that we need to rethink how we look at the world, such that our concept of the very foundations of the international system is wrong.  Our models are wrong.  Thus, we are unprepared for events such as the 2008 Global Financial Crisis, economic development in developing countries, or Chinese advancement and global expansion.  We just don’t understand how it all works because we all want to classify and model everything, but not everything is cut and dry.  It’s unpredictable.

Although I agree that our leaders are often shortsighted, I disagree that we should throw out all our models.  We just need to better understand the limitations of models.  Often we want an input to equal a given output for every problem; we want a one-size-fits all policy solution to immense global problems.  This just doesn’t work, but I disagree with Ramo’s argument that we need to start over in our thinking. 

Ramo thinks we should take our thinking to the next level, understanding that our previous conceptions can be “mashed” together to make completely new ideas.  However, his lack of clarity on HOW we should move forward muddies his argument to the point of ambiguity.  It is a very hard argument to follow, especially since he uses unconventional sources of evidence.  I personally don’t like the idea of following the legacy of ingenuity created by Hezbollah, although Ramo seems to think that it doesn’t matter the ends, only the means if it leads us to advance.  I would argue that these advances are wrong.  To an extent he agrees, using the ingenuity of Hezbollah to show the extent to which we must be ingenious in order to beat them. 

Sadly in this, I think Ramo is correct; we will never beat terrorists, solve global poverty, or save the environment by looking at the problem the same ways it has been for decades.  However, like most authors, Ramo seems to be better suited to complaining about the problems and has failed to provide practical methodology for finding real solutions to the problems.  His argument falls short of being worthy in that the reader is left to puzzle.  Beyond now looking differently at the problem, the conversation has advanced no closer to being solved.